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Part of this is because of the tangible and obvious benefit of the stocks paying investors cash to hold them; this income helps boost total returns, all else equal. But in addition to that, the best dividend-paying stocks tend to be extremely resilient and profitable businesses under just about any kind of economic climate. This means profits move higher under most circumstances, and thus, the share price follows.
A year dividend increase streak means that any company in this list is able to not only pay its dividend during recessions but also raise it. That helps with volatility during tough market periods, but it also provides the benefit of income, even when the going gets tough. Importantly, great dividend stocks have management teams that are not only able to pay dividends during all kinds of market climates, but the willingness to do so.
There are many stocks today with plenty of earnings and free cash flow that choose instead to focus on investing in future growth rather than returning cash to shareholders. The best dividend stocks have management teams that understand the importance of dividends and are willing to defend the dividend no matter what.
One way we can see the relative performance of Dividend Aristocrats, as a proxy for dividend stocks in general, is to plot it against the benchmark. The exclusivity of the Dividend Aristocrats gives investors an idea of just how difficult it is for a company to raise its dividend for at least 25 consecutive years. What is plotted is total returns, which includes dividends. We can see that prior to the COVID-driven selloff in early, the Dividend Aristocrats outperformed the benchmark for many years, and in some cases, by very wide margins.
Part of these returns were driven by the prevailing interest rate environment during this time, as falling interest rates makes income securities relatively more valuable. When we are looking at investing in dividend stocks, doing so for the long-term is the best approach, and over the long-term, dividend stocks are the winners in more ways than one.
After all, one of the major benefits of owning high-quality dividend stocks over time is that it provides the extra boost of total returns that is achieved via receiving dividend income. Below is an example of how dividends add to total returns over time. However, the principal is exactly the same; owning dividend stocks helps boost total returns over time.
This is a terrific way to isolate the impact of receiving dividends versus not receiving them as this is a comparison of a dividend stock index against itself, and shows just the difference of receiving dividend payments versus not receiving them. If you own high-quality dividend stocks, your total return could certainly look like this over a long period of time, which is why investing in the best dividend stocks can help investors build significant wealth over many years.
In addition to this, high-quality dividend stocks tend to offer investors upside participation during periods of strong market rallies, while also offering some extent of downside protection when the stock market is declining. High-quality dividend stocks give investors access to very resilient and time-tested businesses, the tangible benefit of an income stream that can be spent or reinvested to generate even more wealth longer-term, and some protection during market downturns.
This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money. The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
Looking for an investment that offers regular income? High-dividend stocks can be a good choice. What are dividend stocks? Dividend stocks distribute a portion of the company's earnings to investors on a regular basis. Most American dividend stocks pay investors a set amount each quarter, and the top ones increase their payouts over time, so investors can build an annuity-like cash stream.
Investors can also choose to reinvest dividends if they don't need the stream of income. Here's more about dividends and how they work. Companies that pay dividends tend to be well-established, so dividend stocks may also add some stability to your portfolio. That's one reason they're included on our list of low-risk investments.
Dividend ETFs or index funds offer investors access to a selection of dividend stocks within a single investment — that means with just one transaction, you can own a portfolio of dividend stocks. The fund will then pay out dividends to you on a regular basis, which you can take as income or reinvest. Dividend funds offer the benefit of instant diversification — if one stock held by the fund cuts or suspends its dividend, you can still rely on income from the others.
Learn what it is and how to start earning it. And that difference can really add up. In general, a good rule of thumb is to invest the bulk of your portfolio in index funds, for the above reasons. But investing in individual dividend stocks directly has benefits. Although it requires more work on the part of the investor — in the form of research into each stock to ensure it fits into your overall portfolio — investors who choose individual dividend stocks are able to build a custom portfolio that may offer a higher yield than a dividend fund.
Expenses can also be lower with dividend stocks, as ETFs and index funds charge an annual fee, called an expense ratio, to investors. Find a dividend-paying stock. You can screen for stocks that pay dividends on many financial sites, as well as on your online broker's website. We've also included a list of high-dividend stocks below.
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